As we commented here, increase in spreads could indicate decrease in ratings down the line. The chart indicates that the BBB spread has jumped up following the market collapse this month. Insurers hold significant amounts of this ratings class – see e.g. the Just Group financial report out today, p.17, so they are at some risk of their holdings being downgraded to junk status.
InsuranceERM comments today “Widening credit spreads and bond downgrades will weaken insurers’ capital, particularly for life insurers with guaranteed products or large portfolios of annuities. Bond downgrades will either force insurers to hold more capital, or sell the assets.” Correct, and as we noted in our earlier post, the assets sold will have to be replaced by better-rated assets, generating an instant and irrecoverable loss.
Zerohedge discusses the problem here, noting that $3 trillion in bonds are on the cusp of downgrade, that the bulk of BBB rated issuance was used to fund the trillions in buybacks that levitated the stock market over the past few years, and stating (without any sense of alarmism, meh) that
as of this moment, over $140 billion of debt issued by independent oil and gas producers, oilfield services providers and integrated energy companies has triple-B credit ratings from Moody’s or S&P and is now at risk of falling to junk status.
But as they also note, rating agencies have in the past been “painfully behind the curve and slow to adjust to changing fundamentals” so it will take some time for all this to work out.
Fortunately life insurers have plenty of time.
